Sometime last week I got an e-mail from a client of mine with a question about a loan modification he was attempting. Here’s an excerpt:

“Hi Jim;

Was wondering if you knew of any honest Home loan modification business’s?  You would not believe what some of these firms want me to do to have my Loan modified.  From saying that I’m renting my house for $2000 and I’m living in one room (yes that would be 4 people, in one room) or saying that my wife is a housekeeper so that her income can’t be traced…..  Huh!  Their complete lack of any sort of ethics is troubling to say the least.  Anyway any leads to a firm with a smidgen of integrity would be appreciated. thanks,

Vincent”

Unfortunately, I don’t have any leads for him either. I’m yet to have any client of mine be successful trying a loan mod, nor have I heard of anybody else with a successful loan mod story either. I know folks that have worked diligently for months, after being told to stop making their payment, only to have a notice of default filed on their property. I know folks who have accomplished every criteria placed in front of them…only to be rejected at the end of the journey. I’m not sure anybody really gets these things to work.

In case you missed it, a loan modification is a thing that theoretically happens when a homeowner asks his lender to alter the nature of their loan to allow said homeowner to stay in their home. Again, theoretically, the lender will adjust the interest rate to help the homeowner do just that. The problem is, supposedly only 1 to 2% of the modifications are really actually happening.

Vincent’s e-mail really illustrates the problem well. Some of these loan mod folks are quick to tell you the 1001 ways that you should lie to the lender to maneuver them into complying with your request. Often times fees are paid up front to begin the process as well…and then the odds are so greatly against having it all come together if these statistics are real. From what I’m seeing…I think they are.

I wish I had an answer for all this…my advice would be that if you’re considering this option…be really, really careful.

Just about a year ago there was all this nervousness because lenders were tightening up on their criteria and unless you had 20% down it was going to be very hard to buy a home around here. Of course, it is harder when you have 10% or less down and you have to jump through a bunch more hoops to get a place if you’re using an FHA loan…but it is do-able. The anticipation was that most folks were simply going to have to save more money before taking the plunge and that would slow the market down since it was going to take awhile to get that big old 20% number. Right?

It sure doesn’t seem that way to me so far in 2010. What it seems like is that everybody has a ton of money! On some of my listings this year, 4 of the six offers on Dory had at least 30% down…one had 50% down. Catamaran had two offers that had 30% down. Alameda got an offer with 40% down. Many other transactions I’ve done with buyers have had them competing with other offers that have had large down payments and in many cases all cash offers have won the day.

Yesterday I presented an offer that was one of six. We had 25% down, 2 other offers had 35 and 40% down and one was all cash. Having said that, we’re not talking about small houses. We’re talking about houses selling for $1,000,000. It’s amazing how many folks have $350,000 to $400,000 to put down! In this era when appraisals have been an issue it’s comforting for a seller and thei agent to see offers with such high down payments. It, of course, is also frustrating for a buyer who has 20% down (can you imagine having $200,000 as a liability?) when they have to compete with these other folks. Even with 50% down it becomes a challenge when seemingly so many others have cash and can close in a week on a property…and then offer free rent back!

It’s becoming sort of crazy again in some market segments. Sort of like 2004, only everybody playing is very well qualified and has a ton of money!

Here comes a rant. The title above implies a joke is coming…it is! In September I wrote a post about the difficulty of buying a single family house using an FHA loan. Hilariously, I thought that was difficult! Silly me! Wait until you see what it’s like buying a condo around here using FHA!

Here’s the thing, up until about a year or so ago FHA didn’t really exist around these parts. The mortgage meltdown and the pounding that Fannie and Freddie took brought about a new era of lending to folks who had less than 20% down and the burden of that fell onto FHA. FHA backed loans are possible for all of those folks, but if you’re a buyer and you have less than 10% down you’re certain to need an FHA loan. It’s certainly understandable that FHA would have strict criteria since the risk is greater with buyers who have 5% or less down. Often the process is daunting to say the least to qualify for one of these loans. The appraisals, for one thing, are much more rigid than conventional loans and often seem to be more like inspections. If there’s an outstanding problem the deal could easily be at risk. Consequently, many listing agents are fearful of buyers with FHA loans since the risk to their seller is so much greater. If a seller has a choice between a buyer with a conventional loan and one with an FHA loan they almost always take the conventional buyer.

Well, we now have a new and more painful twist. For condo/townhouse buyers, FHA prefers to loan on projects that are approved in advance by them. Since FHA is almost new to this area there are very, very few projects that have gone through their process and have been approved. In Foster City, Marina Point is the only approved project. In Redwood Shores, none of the projects have been approved. It’s like that in most of the Peninsula communities…and why not? FHA is new to the Peninsula…their approval was never important before.

FHA has, up until now, allowed a “spot” approval process that made an exception for condo and townhouse projects that were not on their official list and thus local buyers with less than 10% down could actually purchase a home here. As of February 15, however,  FHA has scrapped the “spot” approval program. If you want to buy a condo at the Admiralty, or a townhouse at Nantucket Cove for example, the whole project will need to go through the approval process before you can close. Depending on who you talk to that could take months…if they do it at all. I also heard today that the process will require that HOA’s change their master insurance policies to cover interior walls…a level of coverage that hasn’t been required before.

What does this all mean? I’m thinking it could mean that FHA is taking first time condo/townhouse buyers with less than 10% down out of the marketplace all together. It means that if you have a condo at the Admiralty and want to sell, the pool of prospective buyers just got alot smaller. If you’re a seller and an offer comes in with an FHA loan, why would you want to consider it at all? If this insurance issue is correct, why would any HOA want to be approved at all? It also means that if you’re a buyer…you better save enough for a 10% minimum down payment so that you can qualify under a conventional loan. For what it’s worth, here’s a website that allows you to check, by town or zip code, approved condo/townhouse projects. If it shows “error” that means there are none in that area.

https://entp.hud.gov/idapp/html/condlook.cfm

I sure keep getting great ideas when blog readers send in questions! I got another great one the other day from Debbie who wanted to know the importance of using a local lender for a purchase. She had been told, erroneously, that it wasn’t OK to use a San Jose lender for her purchase because that lender was out of the area. Here’s my opinion…I think it very well could be a mistake to use an out-of-area lender for a purchase around here. I also think that San Jose is local!

This is a very tech friendly environment we live in around here and it’s not an uncommon notion for many folks who are employed by technology firms to want to use an online lender for their purchase. Unfortunately, I’ve had more than one escrow disaster when a buyer has insisted on using an online lender…who often is located outside of California. They’ve proven to me to be slow to respond and unfamiliar with local customs. I really think it’s important to have a representative in this area that can handle the inevitable bumps that occur along the path to closing. I remember one poor buyer who found a lender in up state New York online and paid them the loan points up front to get him a loan. Ten days prior to closing they couldn’t find his file when his agent called! He was forced to abandon his already paid fee so that he wouldn’t lose his deposit as he approached a closing that no one was sure was going to happen. He had to change lenders to BofA locally…who closed it a few days late.

I also had a recent request from a buyer to use an online title company to complete our transaction. I actually had never heard of such a thing…but we talked his agent into using a local firm for that. I can’t imagine wanting to send a $30,000 deposit to a Title company that’s not even in the Bay Area.

I think most agents have folks they trust who they know can get the job done. As buyers you sure have plenty of choices but keeping things local is, most likely, going to save you enormous headaches in the long run.

A couple of weeks ago at my fun listing at 9 Violet in San Carlos one of the neighbors came into my open house and told me that, in the process of refinancing, his appraisal came in at $710,000. Interesting since he has the identical unit to the one I have for sale…and it’s listed for $879,000. Both of these units have expansive views of the Bay. I just closed one without a view on Violet for $761,000. In addition to that a larger view unit 2 blocks away in the same project just closed last week at $915,000. The neighbor wanted my advice about what he should do.

Then last week I get a comment here on the blog from Michelle that her waterfront, 3 bedroom townhouse just got appraised at $540,000 even though there are units in her complex listed for more than $650,000.

Appraisals are brutal right now. To make matters worse it’s no longer OK for the lender’s loan officer to actually talk to their own appraiser about the values of these properties. It’s a knee jerk reacti0n to the mortgage meltdown. Whatever the appraiser says, goes…even if they don’t have the foggiest notion of values in a given area.

I heard a story a week or so ago, an agent that I know had an escrow locally on a purchase of  $2,080,000. The appraisal came in at $2,050,000 and they buyer wanted to pay for a second appraisal hoping to bring it in at value. The bank randomly sent out an East Bay appraiser who was completely unfamiliar with our area…and his appraisal came in at $1,400,000! It seems like everybody I’m talking to right now has an appraisal horror story. I honestly don’t understand these refi appraisal stories though. In the case of Violet Lane there were comparables that truly did support a higher value. Why not use them to support the refi? Does the lender in question just not want to loan right now? Are these appraisers so very frightened of over committing on value that they intentionally aim low?

One thing I do know…it’s an interesting time. If I were trying to refinance right now and got an appraisal like the ones mentioned above I’d definitely have another one done. If you’re in this boat right now, be patient and be persistent.

I was going to use a photo of an Elephant, but I decided that I liked this Hong Kong tourist trap better. Of course, neither image is even slightly relevant to this post so it doesn’t make much difference anyway!

One of the most difficult aspects of the Real Estate business in this area has been the difficulty in obtaining  a jumbo mortgage loan. Most of all the talk about low interest rates on home loans has pretty much been focused upon conforming loans, or loans of $415,000 or less. These loans are backed by Fannie Mae, Freddie Mac or FHA and are typically not the type of loan needed by most buyers of single family homes in Foster City…or elsewhere in the Mid Peninsula. Not only has the criteria become more rigid but the interest rates on jumbo loans have really been significantly higher than on conforming products.

Now it would appear that some major banks are heading into the jumbo market again and are now originating loans at much more affordable rates…in fact under 6% in many cases. Since it’s entirely possible that all 39 of Foster City’s active single family listings could have buyers that would need a jumbo loan, this could be a really good thing for the local marketplace and the stability of home values here. We’ll see…

Here’s a link to a Washington Post article from Saturday about this topic:

Washington Post Jumbo Article

There’s a terrific website that I read alot called Agent Genius and the other day I happened upon a great post written by that site’s founder, Benn Rosales, titled “Freedom of the Press”. I liked it so much that I decided to post it verbatim right here. I’ve had the same experience calling lenders as Benn…there’s money out there and available. If you’re qualified you can get an FHA backed loan, right now, with as little as 3% down. Betcha didn’t hear about that on CNN, huh? By the way, I myself felt a little like the chicken in that photo above last week too, so believe me, I’m not calling anybody out. Anyway, here’s Benn’s piece:

Controlling the Message

A poll reported on FOX News yesterday told America that over 60% of us are paying very close attention to the economy and the financial mess on Wall Street- this would be a great thing if the pundits on the issues actually had a clue what was going on.

Irresponsible Rhetoric

I’ve heard on a daily basis that you cannot get a home loan, and each day I’ve reached out to local lenders and asked if anything has changed. Over and over again, I am told that money is flowing fine, and not to listen to the news. Well, that’s great, but 65% of the country is listening to the news, and if it’s wrong, then over 65% of Americans will more than likely believe what they’re hearing.

Who’s in Charge?

I’ve heard over and over again after 9/11 when George Bush called on Americans to go shopping, to spend money, that the country did exactly that. I have to wonder, if the opposite is being said to 65% of Americans today- don’t bother, our economy is dead. Who’s in charge around here? The media? Who determines the course of America’s future- the press? After all, all we heard all weekend was to not to invest in the market, and it surprises me that folks were surprised when a massive sell off occured after the opening bell Monday morning.

Apparently They Control the Message

This isn’t an attack on the free press, but it is an attack on the pulpit they’re being given in a so called crisis. If you give the press enough room they’ll hang us all if no one steps up and leads on the issue. Someone needs to step up, someone needs to set the correct message, someone needs to set records straight, otherwise, the solutions being formulated will only be met in the end with a larger challenge- a paralyzed market.

Recession/Depression is the New Reality

It must be true, because I heard it on FOX, CNN, MSNBC, CBS, ABC, NBC, and on the radio. Why must it be true? Because no one is leading on this issue but the press and they’re leading with a Headline that says “DOOM!”

The credit crunch is real, the ability for businesses to get credit is a huge reality, but I’m not sure that scaring Americans into mattress stuffing is an answer that will help small, medium, nor large employers.

So I’ll Do My Part

Yes, you can get a home loan, yes, you can buy a house, and yes, you can save a ton of money when you buy one, and no, the quick flip is not a great idea, but the long term investment of home ownership is.

Help your local small businesses by doing some shopping, call your stock trader and see if there are any choice bargains and pick up a few shares, take your family out to eat, trade in that gas guzzler for something a little more efficient. I don’t care what you do, so long as you don’t allow your fears to overtake you.

I realize that what I am saying is not a gut wrenching analysis of the economy and financial problems in the market, but rather, a snapshot of a country that is gripped with fear that is being fed between each commercial break- by what we call “the free press.”

Good job Benn! Three agents told me they each had over 100 people at their open houses Sunday…two days ago.

I received a call from a really sweet, very well intentioned young lady the other day who was all excited about the possibilities of buying a foreclosure very cheaply. She had been trolling through one of the 8 million Foreclosures R Us websites and had found several deals that had fired her up. According to her, there was a 4 bedroom, 3 bath house on Halsey in Foster City that she could get for $26,819. If that didn’t come through she was also interested in a 3 bedroom, 2 bath house on Laguna in Burlingame for $12,227 or another house on Ribbon in Foster City for $14,707. Honestly, I’m really not sure what these amounts represent…mostly because I didn’t want to pay the $39.95 required to get more information, but I’m reasonably sure that neither this young lady, or me…or you for that matter, is going to buy one of these houses for those prices.

My suspicion is that we’re seeing a default number on something other than a first loan. Maybe it’s a small second that a homeowner is behind on…heck, for all I know it’s a car loan in default! I just know that in this area people are not buying houses at 1965 era prices. We chatted some more about this topic and inevitably I asked her if she had spoke to a lender about getting a loan…she had not. Turns out both she and her husband have jobs that are basically off the books. He’s a handy man and she walks dogs. They filed bankruptcy 5 years ago and she said they’re about to make their last payment to the IRS clearing them of a debt there too. If necessary they could probably come up with $10,000 for a down payment…as a gift. I hope it doesn’t sound like, in any way, like I’m making fun of these folks. She was sincere and really wanted to get on track. I offered to meet with them and help them create a gameplan that might pay off for them some time in the future, but it’s not going to be now.

It occured to me that just a few years ago there were lenders that probably would have given them a home loan. Stated income, zero down, sub-prime. It would have buried them then like it would bury them now. I don’t believe in get rich quick schemes. If you’re thinking about buying, spend plenty of time and energy creating a financial plan that will allow you to actually afford the home you’ll be buying and forget about the phantom $25,000 4 bedroom home in Foster City.

In the “never a dull moment” world of lending it sure seems like the programs offered, along with the criteria expected, changes every week. In fact, the criteria has gotten signifcantly tighter. Maybe the most significant area among these changes are the minimum down payments lenders are now requiring before they’ll give you a loan. For many lenders those minimums are now 15% and some are even 20%.  Long gone are the zero down, stated income, days of the past! 5% down deals were not uncommon last year and I had several sales this year where the buyers had 10% down but those options have shrunk considerably as 2008 has progressed. You can still buy with less down, several lenders offer FHA backed loans that will allow 3% down, until the end of this year, but there’s alot of hoops to jump through to get them. If you’re a lender don’t hesitate to comment about your lower down programs. My point though, is that the chances are that to get a really good loan product you’re most likely going to need more cash going in.

If you’re moving up from an existing residence the chances are pretty good that your down payment is coming from that source but in many other cases, and especially with first time buyers, acquiring a 15% down payment around here could pose a bit of a challenge. A typical first time buyer in Foster City is going to be looking for a condo or townhouse and the median price for one of those right now is $552,000…thus a down payment of at least $82,800 will be needed. Certainly, there are plenty of folks who are good savers and plenty of others who have great options but there’s also many out there who’re going to feel like it’ll be years until they can save up enough to make this crazy dream work. For those folks, here’s my advice: Ask for help.

I can’t tell you how many first time buyers I’ve worked with who have been in that position yet have been either absolutely terrified of asking for help or are adamantly opposed to it. When Lesley and I bought our first house we, too, were terrified. The thought of asking my parents for help was horrific! I wanted to prove something to them, after all, plus I was certain they would say no. I was wrong…both of our families turned out to be highly supportive and we couldn’t have done it without them. I had clients a couple of years ago whose entire immediate family raised $1.2 million in cash so it would be easier for them to compete in a multiple offer frenzied environment. After they bought they refinanced and paid the family back. I had a client who is the pastor of a church whose congregation raised money for their down payment so they could buy a home, and I also had some clients who casually mentioned to a group of friends at dinner one night that they were considering moving out of the Bay Area so that they could buy a house…and discovered that a few weeks later their friends had formed an investment group who put in $350,000 so that this family could buy and stay here. All this because somebody asked for help. I’ve also seen clients that I worked with 10 years ago, when the median price of a single family house in Foster City was $500,000, continue to rent to this day because they refused adamantly to ask family for help…it wasn’t that they asked and were rejected, they just wouldn’t ask. I don’t know why I was so uncomfortable with the thought of asking my family for help with our down payment…I really look forward to the day when my daughters come to me and ask for assistance. What a privilege it will be to help them!

I was at the Title company today to sign papers with my clients who are selling their Foster City townhouse when our escrow officer informed us that of the five files on his desk ours was the only one that the loan documents had come in on time…and thus we were on schedule to close on time next week. The other files he had were due to have closed either earlier this week or last week and were still awaiting the arrival of those precious docs. I had to laugh because I thought it was only my deals this year that had gone completely haywire from a timing standpoint! Why, you ask? The reason is because the lenders right now have become really, really strict when it comes to their guidelines. I actually had a transaction last month that was delayed almost two weeks and one of the reasons was that the buyers were $178.00 short on their cash reserves and the lender’s underwriter was uncomfortable drawing the loan docs if they were in any kind of a negative situation. $178.00. On a $700,000 loan. I actually put $200.00, of my own money, in my buyer’s savings account to put them in the black. The underwriter asked for a copy of the receipt! Needless to say, the easy, breezy days of zero down and stated income loans are over…the pendulum has swung pretty far in the other direction. Many lenders right now are back to requiring 20% (or more) down.

There are other loan products available but here’s an obvious fact, for the time being you’ll need to really have your ducks in a row if you’re buying right now. For quite awhile almost everybody could go from the idea stage to closing in a relatively short amount of time. If you’re thinking of buying now you really need to have, and work, a plan. You have to have an adequate down payment (and it needs to be your own money). You have to have a good credit score. You need adequate cash reserves and your debt to income ratio has to conform to lender’s standards…which actually keep getting tighter.

All of this is good too! We desperately needed to get back to some form of sanity. It’s OK if you can’t buy a property for 6 months or more. If you’re ducks are actually in a row you’ll find it much easier to handle that mortgage payment. If you’re kicking around the idea of buying, even if that involves a move up and the sale of a property it’s a must to spend plenty of time with a mortgage professional to create a successful game-plan. Once you do that you’ll greatly reduce the stress of the escrow process and close on time.